Summary: Red Hat reports third quarter 2013 (ended November) results on Thursday, December 20, after the market close. We expect the company to post reasonable results with constant‐currency billings roughly 100‐200 basis points above current consensus expectations of 17%‐18%. In addition, given the appreciation in the euro and the continued strength in the core business, we believe the company will likely raise full‐year revenue guidance slightly.
Our OEM and system integrator (both traditional and offshore) checks indicate that the company is witnessing healthy demand for RHEL 6 and JBoss, despite the macroeconomic malaise. Red Hat typically outperforms its peers in constrained budget environments,
given its subscription revenue model and lower cost. Server shipments accelerated during the quarter (up 0.6% year‐over‐year versus a 4% decline last quarter) and Linux server revenue continued to experience relatively strong demand. Linux servers now
represent 22% of server shipment revenue (up roughly 8% from the prior year’s quarter), implying roughly high‐single‐digit growth in Linux server shipments (demonstrating Linux’s continued share gain against Unix, which declined roughly 14%
from a revenue perspective). In addition, the company’s newer offerings, such as RHEV and Red Hat Storage continue to track well.
We expect fiscal 2013 revenue guidance to be at least maintained if not revised upward by 25‐50 basis points. Current guidance is 16%‐17%, or $1.32 billion‐$1.33 billion. We expect non‐GAAP EPS guidance to be maintained or raised slightly. Guidance currently calls for non‐GAAP EPS of $1.15‐$1.17. We would be buyers of the stock, given that Red Hat offers the only viable enterprise‐ready data center operating system. The stock trades at 20 times on a calendar 2013 enterprise‐value‐to‐free cash flow multiple, below the software‐as‐a‐service peer group at 24 times.
Despite the macroeconomic malaise, server shipments grew 0.6% year‐over‐year, to 2.1 million units (versus slowing 4.0% year‐over‐year in the second quarter). Linux server revenue continued to experience relatively strong demand as it continues to benefit from high‐performance computing and cloud infrastructure deployments. In fact, we estimate that new Linux server revenue increased by roughly 8% year‐over‐year and now has 22% revenue share. Coupled with pricing increases, replacements, free‐to‐paid conversion, and reasonable OEM billings growth, we are comfortable that Linux billings growth was close to 15%. Red Hat should continue to benefit from this trend, and we believe that Linux will continue taking share in the market, mainly the expense of Unix (which witnessed a revenue decline of 14% in the third quarter) and incrementally from Microsoft.